U.S. Department of Justice

Two Countrywide mortgage servicing companies will pay $108 million
to settle Federal Trade Commission charges that they collected
excessive fees from cash-strapped borrowers who were struggling
to keep their homes. The $108 million represents one of the
largest judgments imposed in an FTC case, and the largest mortgage
servicing case. It will be used to reimburse overcharged homeowners
whose loans were serviced by Countrywide before it was acquired
by Bank of America in July 2008.

“Life is hard enough for homeowners who are having trouble
paying their mortgage. To have a major loan servicer like Countrywide
piling on illegal and excessive fees is indefensible,” said
FTC Chairman Jon Leibowitz. “We’re very pleased
that homeowners will be reimbursed as a result of our settlement.”

According to the complaint filed by the FTC, Countrywide’s
loan-servicing operation deceived homeowners who were behind
on their mortgage payments into paying inflated fees – fees
that could add up to hundreds or even thousands of dollars.
Many of the homeowners had taken out loans originated or funded
by Countrywide’s lending arm, including subprime or “nontraditional” mortgages
such as payment option adjustable rate mortgages, interest-only
mortgages, and loans made with little or no income or asset
documentation, the complaint states.

Mortgage servicers are responsible for the day-to-day management
of homeowners’ mortgage loans, including collecting and
crediting monthly loan payments. Homeowners cannot choose their
mortgage servicer. In March 2008, before being acquired by Bank
of America, Countrywide was ranked as the top mortgage servicer
in the United States, with a balance of more than $1.4 trillion
in its servicing portfolio.

When homeowners fell behind on their payments and were in default
on their loans, Countrywide ordered property inspections, lawn
mowing, and other services meant to protect the lender’s
interest in the property, according to the FTC complaint. But
rather than simply hire third-party vendors to perform the services,
Countrywide created subsidiaries to hire the vendors. The subsidiaries
marked up the price of the services charged by the vendors – often
by 100% or more – and Countrywide then charged the homeowners
the marked-up fees. The complaint alleges that the company’s
strategy was to increase profits from default-related service
fees in bad economic times. As a result, even as the mortgage
market collapsed and more homeowners fell into delinquency,
Countrywide earned substantial profits by funneling default-related
services through subsidiaries that it created solely to generate
revenue.

According to the FTC, under most mortgage contracts, homeowners
must pay for necessary default-related services, but mortgage
servicers may not mark up the cost to make a profit or charge
homeowners for services that are not reasonable or appropriate
to protect the mortgage holder’s interest in the property.
Homeowners do not have any choice in who performs default-related
services or the cost of those services, and they have no option
to shop for those services.

In addition, in servicing loans for borrowers trying to save
their homes in Chapter 13 bankruptcy proceedings, the complaint
charges that Countrywide made false or unsupported claims to
borrowers about amounts owed or the status of their loans. Countrywide
also failed to tell borrowers in bankruptcy when new fees and
escrow charges were being added to their loan accounts. The
FTC alleges that after the bankruptcy case closed and borrowers
no longer had bankruptcy court protection, Countrywide unfairly
tried to collect those amounts, including in some cases via
foreclosure.

Settlement Terms

The FTC’s complaint and settlement order name two mortgage
servicers as defendants: Countrywide Home Loans, Inc. and BAC
Home Loans Servicing LP, formerly doing business as Countrywide
Home Loans Servicing LP. The settlement requires Countrywide
to pay $108 million, which will be refunded to homeowners who
Countrywide overcharged before July 2008.

In addition, the settlement order prohibits Countrywide from
taking advantage of borrowers who have fallen behind on their
payments. The defendants continue to service millions of mortgage
loans, including tens of thousands of loans involving borrowers
in bankruptcy and foreclosure. In the servicing of loans, the
defendants are permanently barred from:

Making false or unsubstantiated representations about loan
accounts, such as amounts owed.

Charging any fee for a service unless it is authorized by
the loan instruments, by law, or by the consumer for a specific
service requested by the consumer.

Charging any fee for a default-related service unless it
is a reasonable fee charged by a third party for work actually
performed. If the service is provided by an affiliate of
a defendant, the fee must be within limits set by state law,
investor guidelines, and market rates. Defendants must obtain
annual, independent market reviews of their affiliates’ fees
to ensure that they are not excessive.

In addition, Countrywide must advise consumers if it intends
to use affiliates for default-related services and, if so, provide
a fee schedule of the amounts charged by the affiliates.

The settlement also requires Countrywide to make significant
changes to its bankruptcy servicing practices. For example,
Countrywide must send borrowers in Chapter 13 bankruptcy a monthly
notice with information about what amounts the borrower owes – including
any fees assessed during the prior month. The defendants also
must implement a data integrity program to ensure the accuracy
and completeness of the data they use to service loans in Chapter
13 bankruptcy.

This case was brought with the invaluable assistance of the
United States Trustee Program, the component of the Department
of Justice that oversees the administration of bankruptcy cases
and private trustees. This action represents the FTC’s
continuing work to help consumers who have been hurt by the
economic downturn.

The Commission vote to authorize staff to file the complaint
and settlement was 5-0. The complaint and settlement were filed
in the U.S. District Court for the Central District of California.

The Federal Trade Commission is a member of the interagency
Financial Fraud Enforcement Task Force. For more information
on the Task Force, visit www.stopfraud.gov.

NOTE: The Commission files a complaint when
it has “reason to believe” that the law has been
or is being violated, and it appears to the Commission that
a proceeding is in the public interest. The complaint is not
a finding or ruling that the defendants have actually violated
the law. Stipulated court orders are for settlement purposes
only and do not necessarily constitute an admission by the defendants
of a law violation. Stipulated orders have the full force of
law when signed by the judge.

The Federal Trade Commission works for consumers to prevent
fraudulent, deceptive, and unfair business practices and to
provide information to help spot, stop, and avoid them. To file
a complaint in English or Spanish, visit the FTC’s online Complaint
Assistant or call 1-877-FTC-HELP (1-877-382-4357). The FTC
enters complaints into Consumer Sentinel, a secure, online database
available to more than 1,800 civil and criminal law enforcement
agencies in the U.S. and abroad. The FTC’s Web site provides
free information on a variety of consumer
topics.